Answer on Economics of Enterprise Question for mee

2012-11-05T11:38:32-0500

Question #18016

how do a state government receives revenue mainly from a progressive income tax affected by fairly rapid inflation .

Expert's answer

2012-11-06T10:10:54-0500

Tax levied at a rate that increases as the quantity subject to taxation increases.Designed to collect a greater proportion of tax revenue from wealthy people,progressive taxes reflect the view that those who are able to pay more shouldcarry a heavier share of the tax burden. Progressive incometaxes may provide for exemption from tax liability for incomes under a specified amount, or they may establishprogressively greater rates for larger and larger incomes. The presence ofdeductions can also make a tax progressive. Progressive taxes are a stabilizingforce in periods of inflation or recession because the amount of tax revenue changes more than proportionately with an increase or decrease in income. Forexample, in an inflationary economy, as prices and incomes rise, a greaterpercentage of taxpayers&#039; income goes toward taxes. Government revenuesincrease, and the government has more leverage over the economy. A side effectof this system is that lower-income taxpayers have an especially difficult timemaking ends meet when inflation is high. To compensate, many economistsadvocate indexation; several countries adjust their tax rates annually in times of inflation, usually in line with the consumerprice index.